REPORT – Iran deal and Europe’s energy market

SHAFAQNA – Senior politicians from all around the world set up a framework agreement on Iran’s nuclear program as an important political and diplomatic milestone; but the deal is broader in scope than many ever anticipated.

The deal brings to the agenda a number of disputes, the first of which is its effect on energy market.

The agreement between Iran and the group known as P5+1 — the U.S., U.K., Russia, China, France and Germany — announced on April 2 in Lausanne, Switzerland, doesn’t commit either side to action and is merely an outline agreement which will need to be fleshed out over the next three months.

The agreement stipulates the removal of economic sanctions – which sanctions have crippled the Islamic Republic’s economy – in view of bring the Persian Gulf nation closer to the European gas market.

Since the Russia-Ukraine crisis erupted in 2014, Iran has made clear it stands ready to enter the gas race and open its vast reserves in the Caspian Basin to the EU and Turkey. Where Iran’s expansion plans were hindered by strict sanctions before, a lifting of the economic and financial embargo on the Islamic Republic would mean that Tehran is back in the energy game.

Bruce Pannier, expert and energy researcher at RFE/RL said that Iran, being able to export its own gas, and act as a transit country for gas from the Caspian Basin, would be a huge loss for Russia.

Europe, which relies on Moscow for about 30 percent of its supplies, has been seeking to diversify its sources of energy imports for several years now and especially decrease the amount of gas the EU purchases from Russia.

The expert noted that although Russia will continue to be a major supplier of gas to Europe for at least the next decade, Europe’s ability to access gas from Iran, Azerbaijan, Turkmenistan, and other countries would represent a huge financial loss for Russia.

“According to some estimates as much as 25 percent of Russia’s revenue has been coming from Gazprom. Admittedly that figure is certain to go down since the price of gas is following the price of oil downwards,” he said in an e-mail to Shafaqna.

Russia is already re-orienting its gas exports toward Asia, particularly China but that will take a few years to really take hold. That being said, by the time Europe starts receiving Iranian and Caspian Basin gas Russia should be in a position to export its gas to Asia.

The Southern Gas Corridor linking the Trans-Adriatic Pipeline and the Trans-Anatolian Pipeline is the first route that will bring gas from the Caspian Basin and later from Middle East to Europe.

Azerbaijan will be the initial supplier of gas through the SGC but the EU needs to find other gas suppliers if Brussels is serious about reducing Europe’s dependence on Russian gas.

The EU has been in contact with other potential suppliers such as Turkmenistan and Kazakhstan and in the past has also invited Uzbekistan to send officials to discussions on the Southern Gas Corridor.

Pannier noted that Iran and Turkmenistan combined have more gas than Russia does; so if Iranian gas were to also enter the world market, Europe could in theory replace Russia as a supplier entirely.

“That would take probably more than a decade because first, there is the question of how soon sanctions affecting Iran’s ability to sell gas and those sanctions prohibiting Western companies from investing in Iran can be lifted. Then there is the construction of the pipelines and other infrastructures necessary to carry gas to Europe,” he said.

Tehran would face several obstacles that will slow Iran’s entry into Europe’s gas markets: the need to produce more gas on the one hand and the need to build infrastructure to get it to Europe on the other hand. Iran is consuming a large proportion of natural gas and it imports gas from Turkmenistan and Azerbaijan. Also, natural gas production requires much larger investments and the signing of investment contracts generally takes a number of years.

Speaking about possible repercussions on Russian-Iranian ties, the expert noted that it is “a big question”.

Russia has been a major supporter of Iran over the past few years, especially when it comes to international sanctions, Moscow has used its position as a permanent member of the UN Security Council to prevent Iran from being subjected to even harsher sanctions than those already imposed upon the Islamic Republic.

However, Pannier said, Iran will want to burst into the international market and start turning its economy around, something Russia at the moment is in no position to help with.

“The relationship between Tehran and Moscow will remain good but there will be “real politik” at work here and Moscow will have to accept that Iran will be seeking, and finding, new partners in the international community. If Moscow cannot accept Iran’s new place in the international community I think Tehran would opt to reduce its ties with Russia rather than appease an ally that cannot help Iran recover from decades of sanctions,” he said.

Pannier believes that Iran’s relations with Central Asia and the Caucasus should improve quite a bit since the major obstacles to better regional ties with Iran have always been international sanctions and knowledge on the part of countries in the Caucasus and Central Asia that pursuing better ties with Tehran would mean losing Western support and investment.